Insurers rebound as Rita weakens

AlistairBarr

SAN FRANCISCO (MarketWatch) - Insurance and reinsurance stocks rallied on Friday as Hurricane Rita weakened, reducing concerns that the industry will face another huge loss so soon after Katrina.

Earlier this week, Rita was a category 5 hurricane packing winds of up to 170 mph, making it one of the most powerful storms on record.

Rita's winds have now slowed to about 135 mph, making it a weak category 4 or strong category 3 hurricane, according to a Friday morning update from the National Weather Service.

Allstate Corp.
ALL, -0.34%
the second-largest U.S. personal lines insurer, gained 3.3% to $53.67. Before Friday, the stock had dropped more than 10% since Katrina hit Louisiana, Alabama and Mississippi on Aug. 29.

Ace Ltd.
ACE, +7.30%
jumped 6.8% to $46.46. Before Friday, shares of the Bermuda-based insurer and reinsurer had fallen more than 8% this week.

"There's a recognition that Rita is not going to be as bad as people feared," Paul Newsome, an analyst at A.G. Edwards, said. "There was some over-selling yesterday and expectations are growing that there are going to be price increases from this."

Allstate shares have fallen too far, given the company's potential exposure and its future earnings power, Fox-Pitt, Kelton insurance analysts wrote in a note to clients on Friday.

Allstate's market capitalization has dropped by about $4.2 billion since Aug. 26, the day before Katrina struck. That suggests the insurer will lose about $6.5 billion, before taxes, from Katrina and Rita, the analysts said.

"It is possible that Katrina and Rita together could generate this size of a loss, but we believe the market has over-reacted," the analysts concluded. "Even if the size of the combined loss approaches the $6 billion level, we believe a dollar-for-dollar fall in the stock value is not warranted because the earnings power of the company in forward quarters is only minimally affected."

Shares of reinsurers, some of which have been hit much harder than insurance stocks, also rallied on Friday.

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